Long-term dollar/yuan volatilities fell to their lowest level in nearly two months on Tuesday, which dealers said showed an emerging consensus that yuan appreciation would slow in coming months. Offshore one-year dollar/yuan vols slid to 5.69 percent late on Tuesday, their lowest since May 27, from 6.05 percent at the close on Monday.
"With China's inflation trending lower and economic growth slowing in the first half of this year, the government will certainly not allow the yuan to rise in the second half of this year at its previous quick pace," said a US bank dealer in Shanghai. "The market consensus is that yuan appreciation will slow to 3 percent in the second half of this year, less than half of the rise in the first six months."
Offshore one-year dollar/yuan non-deliverable forwards rose to 6.4500 in late trade on Tuesday from Monday's close of 6.4250. Their latest level implied yuan appreciation of 5.77 percent against the dollar from Tuesday's spot mid-point over the next 12 months, down from 6.26 percent implied on Monday.
Six-month dollar/yuan NDFs implied a yuan rise of 2.94 percent over the next six months. "While we agree that the yuan could rise around 3 percent in the next six months, we are less certain that the yuan could still rise another 3 percent in the following six months," said a dealer at a European bank in Shanghai.
China still needs to maintain yuan appreciation in terms of its real, inflation-adjusted effective exchange rate (REER) against a basket of currencies in coming months, as it fights imported inflation, several dealers said. But this could change as soon as early next year if global oil prices come down and the dollar rebounds globally, some believe.
Including its July 2005 revaluation, the yuan has appreciated over 20 percent against the dollar since mid-2005, and its rise is drawing increasing complaints from smaller exporters and some areas of the government. In an interview with Reuters, Chen Dongqi, a senior policy adviser to the economic planning agency, joined a growing chorus of officials and economists saying appreciation of the yuan should be slowed.
He said yuan strength had failed to bring down inflation as much as hoped. "The yuan rose rapidly, yet inflation surged," said Chen, deputy head of the Academy of Macroeconomic Research. "But its negative impacts on exports have been quite visible."
Spot yuan closed higher against the dollar on Tuesday, buoyed by a stronger reference rate fixed by the Chinese central bank in response to global dollar weakness. The yuan finished at 6.8217, up from 6.8300 at the close on Monday. Before trade began, the central bank fixed the daily yuan mid-point at 6.8219, up moderately from Monday's 6.8271.
Comments
Comments are closed.